17017646 balance sheet is the responsibility of the Company's management. Our L responsibility is to express an opinion on the balance sheet based on our audit. We conducted our audit

C~)

~III~III~I~III~~~IIIIII~III OMB Number:

APPROVAL

ber: 3235-0123

Expires: May 31, 2017

17017646 Estimated average burden

hours per response ... 12.00

ANNUAL AUDITED REPORT SE SEC FILE NUMBER

FORM X-17A-5 Matt PrOCC § 9PART III Section

FACING PAGE MAR 0 7 2017Information Required of Brokers and Dealers Pursuant to Section 17 of tWashjngtOn DC

Securities Exchange Act of 1934 and Rule 17a-5 Thereunder 41515

REPORT FOR THE PERIOD BEGINNING 1/1/16 AND ENDING 12/31/16MM/DD/YY MM/DD/YY

A. REGISTRANT IDENTIFICATION

NAME OF BROKER - DEALER:

Merrill Lynch Professional Clearing Corp. OFFICIAL USE ONLY

FIRM ID. NO.

ADDRESS OF PRINCIPAL PLACE OF BUSINESS: (Do not use P.O. Box No.)

One Bryant Park(No. and Street)

New York New York 10036(City) (State) (Zip Code)

NAME AND TELEPHONE NUMBER OF PERSON TO CONTACT IN REGARD TO THIS REPORT

Lizbeth Applebaum (212) 449-4414(Area Code - Telephone No.)

B. ACCOUNTANT IDENTIFICATION

INDEPENDENT PUBLIC ACCOUNTANT whose opinion is contained in this Report*

PricewaterhouseCoopers LLP

(Name - if individual, state last, first, middle name)300 Madison Avenue New York New York 10017-6204

— (Address) (City) (State) (Zip Code)

CHECK ONE:

-1 Certified Public Accountant

❑ Public Accountant

Accountant not resident in United States or any of its possessions.

FOR OFFICIAL USE ONLY

*Claims for exemption from the requirement that the annual report be covered by the opinion of an independent publicaccountant must be supported by a statement of facts and circumstances relied on as the basis for the exemption. See section240.17a-5(e) (2).SEC 1410 (06-02).

I?

Affirmation

I, Lizbeth Applebaum, affirm that, to the best of my knowledge and belief, the accompanying

financial statements and supporting schedules pertaining to the firm Merrill Lynch Professional

Clearing Corp. (the "Company") as of December 31, 2016, are true and correct. I further affirm

that neither the Company nor any partner, proprietor, principal officer or director has any

proprietary interest in any account classified solely as that of a customer.

Signature ,— Date Z f Z "7J/

Chief Financial Officer

YTitle

STS ?-e-c) e= /U[~!C, ,V&

CO,,c.N?y '~f A)Cc,J %

Subscribed and sworn to before meon this 27th day of February, 2017

Z-J . V

Notary public

~~f~~..• :Z elf ~i,

''.,.Y

•.nrtii{'~~

c6ur Y

SECMai! Processing

Section

MAR 01 2017

Washington u..-415

MERRILL LYNCH PROFESSIONAL CLEARING CORP.(S.E.C. I.D. No. 8-333591

BALANCESHEETDECEMBER 31, 2016

IMerrill Lynch Professional Clearing Corp.Table of ContentsDecember 31, 2016

Page(s)

' Report of Independent Registered Public Accounting Firm

Balance Sheet ................................................................................................................................. 1

' Notes to Balance Sheet ........................................................................................................... 2-23

~ I

11

~ I

~ I

PWCReport of Independent Registered Public Accounting Firm

To the Board of Directors of Merrill Lynch Professional Clearing Corp.:n

In our opinion, the accompanying balance sheet presents fairly, in all material respects, thefinancial position of Merrill Lynch Professional Clearing Corp. (the "Company") as of

n December 31, 2016 in conformity with accounting principles generally accepted in the Unitedj States of America. The balance sheet is the responsibility of the Company's management. OurL responsibility is to express an opinion on the balance sheet based on our audit. We conducted

our audit of this balance sheet in accordance with the standards of the Public Companyi Accounting Oversight Board (United States). Those standards require that we plan and- ' perform the audit to obtain reasonable assurance about whether the balance sheet is free of

material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the balance sheet, assessing the accounting principles used and

~- significant estimates made by management, and evaluating the overall balance sheetpresentation. We believe that our audit of the balance sheet provides a reasonable basis for ouropinion.

✓c rck W l~Ao c✓(N~ aarx'I's Li

`r February 28, 2017

L :

F7

PricewaterhouseCoopers LLP, PricewaterhouseCoopers Center, 300 Madison Avenue, New York, 1VY10017T. (646) 4713000, F. (813) 286 6000, www.pwc.com/us

Merrill Lynch Professional Clearing Corp.Balance SheetAs of December 31, 2016

(Dollars in thousands)

Assets

Cash $ 41,897

Cash and securities segregated for regulatory purposes

or deposited with clearing organizations 951,854

Securities financing transactions

Receivables under resale agreements 5,658,769

Receivables under securities borrowed transactions 14,045,610

19,704,379

Derivative assets 189

Other receivables

Customers (includes $250,008 measured at fair value in accordance with the fair value option election) 8,882,369

Brokers and dealers 27,692,655

Interest and other 82,551

36,657,575

Goodwill 72,000

Deferred tax assets 9,359

Other assets 2,357

Total Assets $57,439,610

Liabilities and Stockholders' EquityLiabilities

Securities financing transactions

Pay ables under securities loaned transactions $ 23,731,928

Other pay ables

Customers 21,825,920

Brokers and dealers 2,453,517

Loans due to affiliates 4,696,816

Interest and other 225,44029,201,693

Subordinated borrowings 1,400,000

Commitments and contingencies (see note 8)

Total Liabilities 54,333,621

Stockholders' Equity

Preferred stock, $1,000 liquidation preference per share; par value $1 per share;

10,000 shares authorized; 1,385 shares issued and outstanding 1,385

Common stock, par value $1 per share; 50,000 shares authorized; 2,000 shares issued and outstanding 2

Paid-in capital 2,119,013

Retained earnings 985,589

Total Stockholders' Equity 3,105,989

Total Liabilities and Stockholders' Equity $57,439,610

The accompanying notes are an integral part of this Balance Sheet1

' Merrill Lynch Professional Clearing Corp.Notes to Balance SheetDecember 31, 2016

1. Summary of Significant Accounting Policies

Description of Business'Merrill Lynch Professional Clearing Corp. (the "Company") is registered as a broker-dealer with the Securities and Exchange Commission ("SEC") and as a futurescommission merchant with the Commodity Futures Trading Commission ("CFTC").'The Company provides prime brokerage services such as margin lending, securitiesfinancing, and clearing and settlement to broker-dealers, introducing broker-dealers andother professional trading entities on a fully disclosed basis. The Company is a wholly'owned subsidiary of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S").MLPF&S is the Company's Guarantor. Additionally, MLPF&S is a wholly ownedindirect subsidiary of NB Holdings Corporation ("NB Holdings"), which is a wholly-'owned subsidiary of Bank of America Corporation ("Bank of America").

Basis of PresentationThe Balance Sheet is presented in accordance with United States Generally AcceptedAccounting Principles ("US GAAP"). The Balance Sheet are presented in U.S. dollars.

Use of EstimatesIn presenting the Balance Sheet, management makes estimates including the following;

' • Valuations of assets and liabilities requiring fair value estimates;

• The outcome of pending litigation;

• The ability to realize deferred tax assets and the recognition and measurement ofuncertain tax positions;

' • The carrying amount of goodwill;

• The calculation of incentive-based compensation accruals and valuation of share-based payment compensation arrangements; and

' • Other matters that affect the reported amounts and disclosure of contingencies in theBalance Sheet.

Estimates, by their nature, are based on judgment and available information. Therefore,' actual results could differ from those estimates and could have a material impact on the

Balance Sheet, and it is possible that such changes could occur in the near term. Adiscussion of certain areas in which estimates are a significant component of the

' amounts reported in the Balance Sheet follows:

Fair Value Measurement' The Company accounts for certain financial assets and liabilities at fair value under

various accounting literature that requires an entity to base fair value on an exit price,including Accounting Standards Codification ("ASC") 815, Derivatives and Hedging,

2

Merrill Lynch Professional Clearing Corp.Notes to Balance SheetDecember 31, 2016

L _J ("Derivatives Accounting"), and the fair value option election in accordance with ASC825-10-25, Financial Instruments — Recognition, ("fair value option election").

ASC 820, Fair Value Measurements and Disclosures, ("Fair Value Accounting"),defines fair value, establishes a framework for measuring fair value, establishes a fair

value hierarchy based on the quality of inputs used to measure fair value and enhances

disclosure requirements for fair value measurements. See Note 4 for additional

information on the fair value of financial instruments.r~

Legal ReservesThe Company is routinely a party in various actions, some of which involve claims forsubstantial amounts. Amounts are accrued for the financial resolution of claims that have

either been asserted or are deemed probable of assertion if, in the opinion of

management, it is both probable that a liability has been incurred and the amount of the

loss can be reasonably estimated. In many cases, it is not possible to determine whether

a liability has been incurred or to estimate the maximum or minimum amount of that

-' liability until the case is close to resolution, in which case no accrual is made until that

time. Accruals are subject to significant estimation by management with input fromn

outside counsel handling the matter. See Note 8 for additional disclosures relating to

litigation.

Income TaxesThe Company provides for income taxes on all transactions that have been recognized in

the Balance Sheet in accordance with ASC 740, Income Taxes ("Income Tax

Accounting"). Accordingly, deferred taxes are adjusted to reflect the tax rates at which

future taxable amounts will likely be settled or realized. The effects of tax rate changes

on deferred tax liabilities and deferred tax assets, as well as other changes in income tax

laws, are recognized in net earnings in the period during which such changes are

Li enacted. Valuation allowances are established when necessary to reduce deferred tax

assets to the amounts that are more-likely-than-not to be realized. Pursuant to Income

Tax Accounting, the Company may consider various sources of evidence in assessing

the necessity of valuation allowances to reduce deferred tax assets to amounts more-

likely-than-not to be realized, including the following: 1) past and projected earnings,n including losses, of the Company and Bank of America, as certain tax attributes such as

U.S. net operating losses ("NOLs"), U.S. capital loss carryforwards and foreign tax

credit carryforwards can be utilized by Bank of America in certain income tax returns, 2)

tax carryforward periods, and 3) tax planning strategies and other factors of the legal

entities, such as the intercompany tax allocation agreement. The Company has

concluded that deferred tax assets are more-likely-than-not to be fully utilized, based on

F_ the projected level of future taxable income of the Company and Bank of America,

which is relevant due to the intercompany tax allocation agreement. For this purpose,

future taxable income was projected based on forecasts, historical earnings after

r adjusting for past market disruptions and the anticipated impact of the differences

between pre-tax earnings and taxable income.

11' Merrill Lynch Professional Clearing Corp.

Notes to Balance SheetDecember 31, 2016

t

Hi

N

Hd"

a

Hz

e

The Company recognizes and measures its unrecognized tax benefits ("UTBs") inaccordance with Income Tax Accounting. The Company estimates the likelihood, basedon their technical merits, that tax positions will be sustained upon examinationconsidering the facts and circumstances and information available at the end of eachperiod. The Company adjusts the level of unrecognized tax benefits when there is moreinformation available, or when an event occurs requiring a change. In accordance withBank of America's policy, any new or subsequent change in an unrecognized tax benefitrelated to a Bank of America state consolidated, combined or unitary return in which theCompany is a member will generally not be reflected in the Company's Balance Sheet.However, upon Bank of America's resolution of the item, any material impactdetermined to be attributable to the Company will be reflected in the Company'sBalance Sheet.

Under this policy, tax benefits associated with NOLs (or other tax attributes) of theCompany are payable to the Company generally upon utilization in the Bank ofAmerica's tax returns. See Note 11 for further discussion of income taxes.

Balance Sheet CaptionsThe following are descriptions related to specific balance sheet captions.

CashThe Company defines cash as currency on hand and demand deposits with banks orother financial institutions. The amounts recognized for cash on the Balance Sheetapproximate fair value. For the purposes of the fair value hierarchy, cash is classified asLevel 1.

Cash and Securities Segregated for Regulatory Purposes or Deposited with ClearingOrganizationsThe Company maintains relationships with clients and therefore is obligated by rulesmandated by its primary regulators, including the SEC and the CFTC, to segregate or set

aside cash and/or qualified securities to satisfy these regulations, which have beenpromulgated to protect customer assets. In addition, the Company is a member of

various clearing organizations at which it maintains cash and/or securities required for

the conduct of its day-to-day clearance activities. At December 31, 2016, the Company

had $951.9 million of cash deposited at clearing organizations. The amounts recognized

for cash and securities segregated for regulatory purposes or deposited with clearing

organizations on the Balance Sheet approximate fair value. For the purposes of the fair

value hierarchy, cash and securities segregated for regulatory purposes or deposited with

clearing organization are classified as Level 1.

Securities Financing TransactionsResale agreements are accounted for as collateralized financing transactions and are

recorded at their contractual amounts plus accrued interest, which approximate fair value,

as the fair value of these items is not materially sensitive to shifts in market interest rates

because of the short-term nature of these instruments and/or their variable interest rates or

4

n

F-1

n Merrill Lynch Professional Clearing Corp.Notes to Balance SheetDecember 31, 2016

to credit risk because the resale agreements are substantially collateralized. For the

n

purposes of the fair value hierarchy, resale agreements are classified as Level 2.

The Company may use qualifying securities received as collateral for resale agreementsto satisfy regulatory requirements such as Rule 15c3-3 of the Securities Exchange Act of

F-1 1934, meet margin requirements with the Options Clearing Corporation, and meetliquidity needs.

As of December 31, 2016, the Company had $1.6 billion of securities received underresale agreements that were segregated in special reserve bank accounts for theexclusive benefit of customers and the proprietary accounts of brokers ("PAB") pursuantto rule 15c3-3 of the SEC ("Customer Protection Rule"), which are included inReceivables under resale agreements on the Balance Sheet.

Securities borrowed and loaned transactions are recorded at the amount of cashcollateral advanced or received plus accrued interest. Securities borrowed transactionsrequire the Company to provide the counterparty with collateral in the form of cash,letters of credit, or other securities. The Company receives collateral in the form of cashor other securities for securities loaned transactions. The carrying value. of theseinstruments approximates fair value as these items are not materially sensitive to shiftsin market interest rates because of their short-term nature and/or their variable interestrates or to credit risk because securities borrowed and loaned transactions aresubstantially collateralized. Where appropriate, securities borrowed and securitiesloaned transactions with affiliates are reported on a net basis on the Balance Sheet. For

the purposes of the fair value hierarchy, securities borrowed and loaned transactions areclassified as Level 2.

For securities financing transactions, the Company's policy is to monitor the market value

- ' of the principal amount loaned and obtain collateral from or return collateral pledged tocounterparties, where appropriate. Securities financing agreements do not create material

credit risk due to these collateral provisions; therefore, an allowance for loan losses isunnecessary.

All securities financing activities are transacted under master repurchase agreements or

master securities lending agreements that give the Company the right, in the event of

default, to liquidate collateral held and to offset receivables and payables with the same

r l counterparty. See Note 5 for additional information on securities financing

arrangements.

Derivative Assets and Liabilitiesi The Company's derivative assets and liabilities consist solely of interest rate swap

contracts entered into with MLPF&S to hedge interest rate risk on fixed rate margin

I loans. Derivative assets and liabilities are recorded on a trade date basis at fair value.

r

I.-

Merrill Lynch Professional Clearing Corp.Notes to Balance SheetDecember 31. 2016

Other Receivables and Payables—Customer and Brokers and Dealers BalancesCustomer and brokers and dealers securities transactions are recorded on a settlementdate basis. Receivables from and payables to customer and brokers and dealers includeamounts due on cash and margin accounts, primarily comprised of margin loans andclient cash balances. Due to their short-term nature, such amounts approximate fairvalue. For the purposes of the fair value hierarchy, receivables from and payables tocustomer and brokers and dealers are primarily classified as Level 2.

' Receivables from and payables to brokers and dealers also include amounts due oncommodities futures accounts and unsettled trades (i.e. failed to deliver and failed toreceive). In addition, receivables from brokers and dealers reflect customer related cash

' held in omnibus, settlement and custody accounts with MLPF&S, net of omnibusfinancing transactions.

Customer and broker and dealer margin loan transactions are those in which the'Company will make a loan to finance the purchase of securities. These transactions areconducted through margin accounts. In these transactions, the customers and brokers anddealers are required to post collateral in excess of the value of the loan and the collateralmust meet marketability criteria. Collateral is valued daily and must be maintained overthe life of the loan. Given that these loans are fully collateralized by marketablesecurities, credit risk is negligible and reserves for loan losses are only required in rare

'

circumstances.

'

Securities owned by customers and brokers and dealers, including those thatcollateralize margin or other similar transactions, are not reflected on the Balance Sheet.

Other Receivables and Payables—Interest and Other' Interest and other receivables include interest receivable on customer and brokers and

dealers margin account balances and securities financing transactions. Also included arereceivables from commission and fees, reimbursable exchange fees owed by clients,receivables from dividends and other receivables. Interest and other payables primarilyincludes interest payable on customer and brokers and dealers margin account balancesand securities financing transactions. Also included are amounts payable for dividends,

' taxes, exchange fee payables, and accrued expenses.

Goodwill' Goodwill is the purchase premium after adjusting for the fair value of net assets

acquired. Goodwill is not amortized but is reviewed for impairment on an annual basiswhich for the Company is performed as of .tune 30th, or when events or circumstancesindicate a potential impairment at the reporting unit level in accordance with ASC 350,'Intangibles-Goodwill and Other ("Goodwill and Intangible Assets Accounting"). Aspermitted under Goodwill and Intangible Assets Accounting, the Company performs aqualitative assessment to evaluate goodwill for impairment. Qualitative factors'considered in this assessment include the Company's financial performance, customerbase, liquidity and other relevant events affecting the Company.

6

~l

I'T Merrill Lynch Professional Clearing Corp.l Notes to Balance Sheet

December 31, 2016

Based on the qualitative assessment, the Company concluded that it was more likelythan not that the fair value was greater than the carrying value, and as a result,determined that there was no impairment of goodwill as of the annual test date.

Other AssetsOther assets consist primarily of equipment, leasehold improvements, exchangememberships, and other investments and receivables.

l Depreciation and amortization are computed using the straight-line method. Equipmentis depreciated over its estimated useful life, while leasehold improvements are amortizedover the lesser of the improvement's estimated economic useful life or the term of thelease.

L Loans due to affiliatesThe Company maintains multiple unsecured revolving credit facilities with twoaffiliates, Bank of America and NB Holdings, to meet funding needs. See Note 2 formore information.

F Subordinated BorrowingsL Funding is obtained through loans from Bank of America. See Note 6 for more

information.FL_ New Accounting Pronouncements

In August 2016 and November 2016, the Financial Accounting Standards Board("FASB") issued new accounting guidance that addresses classification of certainreceipts and cash payments, including changes in restricted cash, in the statement of cashflows. This new accounting guidance will result in some changes in classification in theStatement of Cash Flows, which the Company does not expect will be significant, andwill not have any impact on Balance Sheet. The new guidance is effective on January 1,2018, on a retrospective basis, with early adoption permitted.

F7In June 2016, the FASB issued new accounting guidance that will require the earlierrecognition of credit losses on loans and other financial instruments based on an

r expected loss model, replacing the incurred loss model that is currently in use. Under thenew guidance, an entity will measure all expected credit losses for financial instruments

LJ held at the reporting date based on historical experience, current conditions andreasonable and supportable forecasts. The expected loss model will apply to financialassets measured at amortized cost, including loans and debt securities. The new

-' guidance is effective on January 1, 2020, with early adoption permitted on January 1,2019. The Company is in the process of evaluating the impact of the provisions of thisnew accounting guidance.

In March 2016, the FASB issued new accounting guidance that simplifies certain aspectsnof the accounting for share-based payment transactions, including income tax

-' consequences, classification of awards as either equity or liabilities, and classification on

n

L

r - -


If -'

L the statement of cash flows. The new guidance was effective on January 1, 2017 and didnot have a material impact on the Company's Balance Sheet.

In February 2016, the FASB issued new accounting guidance that requires substantiallyall leases to be recorded as assets and liabilities on the balance sheet. This newaccounting guidance is effective on January 1, 2019, using a modified retrospectivetransition that will be applied to all prior periods presented. Upon adoption, for leaseswhere the Company is lessee, the Company will record a right of use asset and a leasepayment obligation associated with arrangements previously accounted for as operatingleases. Lessor accounting is largely unchanged from existing GAAP. The Company is inthe process of reviewing its existing lease portfolios, as well as other service contractsfor embedded leases, to evaluate the impact of the new accounting guidance on theBalance Sheets. The effect of the adoption will depend on its lease portfolio at the timeof transition; however, the Company does not expect the new accounting guidance tohave a material impact on its Balance Sheet. Upon completion of the inventory reviewand consideration of system requirements, the Company will evaluate the impacts ofadopting the new accounting guidance on its disclosures.

In January 2016, the FASB issued new accounting guidance on recognition andmeasurement of financial instruments. The new guidance makes targeted changes to

r existing U.S. GAAP including, among other provisions, requiring certain equityinvestments to be measured at fair value with changes in fair value reported in earningsand requiring changes in debit valuation adjustment ("DVA") for financial liabilitiesrecorded at fair value under the fair value option to be reported in other comprehensiveincome. The accounting for DVA related to other financial liabilities, for example,derivatives, does not change. The new guidance is effective on January 1, 2018, withearly adoption permitted for the provisions related to DVA. Bank of America and theCompany early adopted, retrospective to January 1, 2015, the provisions of this newaccounting guidance related to DVA on financial liabilities accounted for under the fairvalue option. Such adoption had no impact on the Company. The Company also does notexpect the remaining provisions of this new accounting guidance to have a material impacton its Balance Sheet.

2. Related Party Transactions

r -

The Company has entered into various transactions with MLPF&S, Bank of America,NB Holdings, and other companies affiliated by common ownership.

Related party receivables primarily consist of receivables under resale agreementsentered into with an affiliate to satisfy 15c3-3 and PAB reserve formula depositrequirements, cover client short sales, meet margin requirements with clearing

F7 organizations, and meet liquidity requirements. It also includes securities borrowedtransactions entered into with affiliates to obtain securities to cover client shortpositions.

n

FM

1Merrill Lynch Professional Clearing Corp.Notes to Balance SheetDecember 31, 2016

In addition, the Company maintains omnibus, settlement and custody accounts at' MLPF&S for securities and commodities transactions. These account balances are

included within Other Receivables — Brokers and Dealers.

' Included in Derivative Assets are interest rate swap contracts entered into withMLPF&S. The Company has a legally enforceable master netting agreement withMLPF&S. At December 31, 2016, the gross derivative asset market value with

' MLPF&S was $0.2 million. The notional value was $250.0 million.

Related party payables primarily consist of securities loaned transactions with MLPF&S' and other affiliates to finance client activities, unsecured lines of credit (described

below), subordinated borrowings with Bank of America (see Note 6 for moreinformation), and other payables to affiliates, which includes income taxes. It alsoincludes settlement and custody accounts maintained at MLPF&S, which are included'within Other Payables — Brokers and Dealers.

' The lines of credit and borrowing arrangements with affiliates are described below.

The Company has a $7.5 billion committed unsecured line of credit with NB Holdings.Interest on this line of credit is based on prevailing short-term market rates. This facility'will mature on August 1, 2017 and may automatically be extended semi-annually unlessspecific actions are taken 180 days prior to the maturity date. At December 31, 2016,$4.6 billion.was outstanding on this line of credit, which is included in Loans due to'affiliates on the Company's Balance Sheet.

' The Company has a $5.0 billion uncommitted unsecured line of credit with NBHoldings. Interest on this line of credit is based on prevailing short-term market rates.This facility will mature on August 1, 2017 and may automatically be extended semi-annually unless specific actions are taken 180 days prior to the maturity date. There wasno balance outstanding on this line of credit at December 31, 2016.

' The Company has a $1.0 billion uncommitted six month revolving senior unsecured lineof credit with Bank of America. Interest on this line of credit is based on prevailingshort-term market rates. This facility will mature on August 1, 2017 and may

'

automatically be extended semi-annually unless specific actions are taken 180 days prior

to the maturity date. At December 31, 2016, $134.1 million was outstanding on this line

of credit, which is included in Loans due to affiliates on the Company's Balance Sheet.

' The following two tables summarize related party balances included in the respective

balance sheet statement captions.


r-7


Related party receivables are comprised of:

Cash and cash equivalents $ 495Receivables under resale agreements 5,658,769Receivables under securities borrowed transactions 14,045,610Derivative assets 189

-- Receivables from brokers and dealers 14,991,826Interest and other 5,167

$ 34,702,056

n(Dollars in thousands)

Related party pay ables are comprised of:

Pay ables under securities loaned transactions $ 23,731,928Payable to brokers and dealers 163,477

Interest and Other 116,115Loans due to affiliates 4,696,816

Subordinated borrowings 1,400,000

30,108,336

3. Trading Activities

Trading Risk Management

Trading activities subject the Company to market and credit risks. These risks aremanaged in accordance with Bank of America's established risk management policies andprocedures. Bank of America's risk management structure as applicable to the Companyis described below.

Global Risk Management is responsible for providing senior management with a clear andcomprehensive understanding of the trading risks to which Bank of America is exposed.These responsibilities include ownership of market risk policy, developing and

r̂ maintaining quantitative risk models, calculating aggregated risk measures, establishingand monitoring position limits consistent with risk appetite, conducting daily reviews andanalysis of trading inventory, approving material risk exposures and fulfilling regulatoryrequirements.

L.-

Bank of America conducts its business operations through a substantial number ofF subsidiaries. The subsidiaries are established to fulfill a wide range of legal, regulatory,

tax, licensing and other requirements. As such, to ensure a consistent application ofminimum levels of controls and processes across its subsidiaries, Bank of America has inplace a Subsidiary Governance Policy, to which the Company complies. This policy

10

I

f Merrill Lynch Professional Clearing Corp.Notes to Balance SheetDecember 31. 2016

F

- outlines the minimum required governance,. controls, management reporting, financial

F—and regulatory reporting and risk management practices for Bank of America'ssubsidiaries.

LJ

Market RiskMarket risk is the risk that changes in market conditions may adversely impact the valueof assets or liabilities.

Trading positions are reported at fair value and are subject to various changes in market-based risk factors. The majority of this risk is generated by the Company's activities inthe interest rate, foreign exchange, credit, equity and commodities markets. In addition,the values of assets and liabilities could change due to market liquidity, correlationsacross markets and expectations of market volatility. The Company seeks to manage

f_ these risk exposures by using a variety of techniques that encompass a broad range offinancial instruments.

F_ Market Liquidity RiskMarket liquidity risk represents the risk that the level of expected market activitychanges dramatically and, in certain cases, may even cease. This exposes the Companyto the risk that the Company will not be able to transact business and execute trades inan orderly manner, which may impact results. This impact could be further exacerbated

L - if expected hedging or pricing correlations are compromised by disproportionatedemand or lack of demand for certain instruments.

Liquidity RiskLiquidity Risk is the inability to meet expected or unexpected cash flow and collateralneeds while continuing to support the Company's business and customer needs, under arange of economic conditions. The Company's primary liquidity risk managementobjective is to meet all contractual and contingent financial obligations at all times,including during periods of stress. To achieve that objective, the Company analyzes andmonitors its liquidity risk under expected and stressed conditions, maintains liquidity andaccess to diverse funding sources and seeks to align liquidity-related incentives and risks.

Liquidity is defined as readily available assets, limited to cash and high-quality, liquid,unencumbered securities that the Company can use to meet contractual and contingentfinancial obligations as those obligations arise.

In addition, the Company is supported through committed and uncommitted borrowingarrangements with various affiliates (see Note 2 for more information).

Equity Market RiskEquity market risk represents exposures to securities that represent an ownership interestin, a corporation in the form of domestic and foreign common stock or other equity-linkedinstruments. Instruments that would lead to this exposure include, but are not limited to,

11

r-

'~ Merrill Lynch Professional Clearing Corp.Notes to Balance SheetDecember 31, 2016

L equity options and swaps. Hedging instruments used to mitigate this risk include options,

r-, futures, swaps, convertible bonds, and cash positions.

Interest Rate RiskInterest rate risk represents exposures to instruments whose values vary with the level or

r volatility of interest rates. These instruments include, but are not limited to, margin loans,borrowings and derivatives. Hedging instruments used to mitigate these risks includederivatives such as options, futures, forwards and swaps.

Foreign Exchange RiskForeign exchange risk arises from the possibility that fluctuations in foreign exchange

~! rates will impact the value of financial instruments and future cash flows denominated incurrencies other than the U.S. dollar. The type of instruments exposed to this risk primarilyincludes foreign currency denominated margin debit and credit balances. Hedging

r' instruments used to mitigate this risk includes foreign currency denominated debt andforeign exchange spot contracts.

Credit Spread RiskCredit spread risk arises from the possibility that changes in credit spreads will affect thevalue of financial instruments. Certain instruments are used by the Company to managethis type of risk. Swaps and options, for example, can be designed to mitigate losses dueto changes in credit spreads, as well as the credit downgrade or default of the issuer. CreditRisk resulting from default on counterparty obligations is discussed in the Counterparty

Credit Risk section.

Counterparty Credit RiskThe Company is exposed to risk of loss if an issuer or a counterparty fails to perform its

obligations under contractual terms ("default risk"). Credit risk arising from changes in

credit spreads is discussed above.

7 The Company has established policies and procedures for mitigating credit risk on

principal transactions, including reviewing and establishing limits for credit exposure,

limiting transactions with specific counterparties, maintaining qualifying collateral andn

continually assessing the creditworthiness of counterparties.

In the normal course of business, the Company clears, settles, and finances various

customer and brokers and dealers securities and commodities transactions. These

activities may expose the Company to default risk arising from the potential that a

customer, brokers and dealers or counterparty may fail to satisfy their obligations. In

these situations, the Company may be required to purchase or sell financial instruments

at unfavorable market prices to satisfy obligations to its customers, brokers and dealers

or counterparties. The Company seeks to control the risks associated with its customer

and brokers and dealers' margin activities by requiring customers and brokers and

dealers to maintain collateral in compliance with regulatory and internal guidelines.

n

12n

L

r -

i F7 Merrill Lynch Professional Clearing Corp.

Notes to Balance SheetDecember 31, 2016

r-,

Liabilities to customers and brokers and dealers related to unsettled transactions (i.e.failed- to- receive) are recorded at the amount for which the securities were acquired,

^ and are paid upon receipt of the securities from the counterparty. In the case of agedsecurities failed-to-receive, the Company may purchase the underlying securities in the

r

--.

market and seek reimbursement for any losses from the counterparty.

Concentrations of Credit RiskThe Company's exposure to credit risk (both default and credit spread) associated withits prime brokerage activities is measured on an individual counterparty basis, as well asby groups of counterparties that share similar attributes. Concentrations of credit risk canbe affected by changes in political, industry, or economic. factors. To reduce thepotential for risk concentration, credit limits are established and monitored in light ofchanging counterparty and market conditions.

Concentration of Risk to the U.S. Government and its AgenciesAt December 31, 2016, the Company's significant concentration of credit risk was withthe U.S. Government and its agencies. The Company's indirect exposure results frommaintaining U.S. Government and agencies securities as collateral for resale agreementsto meet margin requirements at clearing organizations, satisfy 15c3-3 and PAB reservedeposit requirements, facilitate delivery of clients short sales, and meet liquidity

7 requirements.

The Company's direct credit exposure on these transactions is with the counterparty;r thus the Company has credit exposure to the U.S. Government and its agencies only in

the event of the counterparty's default. Securities issued by the U.S. Government and itsagencies held as collateral as of December 31, 2016, totaled $5.7 billion, which was

r entirely received from affiliated companies.

4. Fair Value of Financial Instruments

Fair Value HierarchyIn accordance with Fair Value Accounting, the Company has categorized its financialinstruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy.

The fair value hierarchy gives the highest priority to quoted prices in active markets foridentical assets or liabilities (Level 1) and the lowest priority to unobservable inputs(Level 3).

Financial assets and liabilities recorded on the Balance Sheet are categorized based onthe inputs to the valuation techniques as follows:

Level 1: Financial assets and liabilities whose values are based on unadjusted quotedprices for identical assets or liabilities in an active market that the Company has

13

i

F--.

F Merrill Lynch Professional Clearing Corp.Notes to Balance SheetDecember 31, 2016

the ability to access (for example, active exchange-traded equity securitiesand exchange-traded derivatives).

' Level 2: Financial assets and liabilities whose values are based on quoted prices inmarkets that are not active or model inputs that are observable either directly orindirectly for substantially the full term of the asset or liability. Level 2 inputsinclude the following:

a) Quoted prices for similar assets or liabilities in active markets (for example,restricted stock);

b) Quoted prices for identical or similar assets or liabilities in inactive markets(examples include corporate and municipal bonds, which can tradeinfrequently);

c) Pricing models whose inputs are observable for substantially the full term of thef asset or liability (examples include most over-the-counter derivatives); and

r

d) Pricing models whose inputs are derived principally from or corroborated byL observable market data through correlation or other means for substantially the

full term of the asset or liability.

Level 3: Financial assets and liabilities whose values are based on prices or valuationtechniques that require inputs that are unobservable and significant to theoverall fair value measurement. These inputs reflect management's ownassumptions about the assumptions a market participant would use in pricing

r the asset or liability. The Company had no Level 3 financial assets measured atfair value as of December 31, 2016.

As required by Fair Value Accounting, when the inputs used to measure fair value fallj within different levels of the hierarchy, the level within which the fair value

measurement is categorized is based on the lowest level input that is significant to theF fair value measurement in its entirety.

A review of fair value hierarchy classifications is conducted on a quarterly basis.Changes in the observability or significance of valuation inputs may result in areclassification for certain financial assets or liabilities. There were no transfers betweenlevels for the period ended December 31, 2016.

Valuation Processes and TechniquesThe Company has various processes and controls in place so that fair value is reasonablyestimated. A model validation policy governs the use and control of valuation models

;L used to estimate fair value. This policy requires review and approval of models bypersonnel who are independent of the front office and periodic reassessments of models

r

to ensure that they are continuing to perform as designed. A price verification group,

14

U

F-7

L_

V' Merrill Lynch Professional Clearing Corp.Notes to Balance SheetDecember 31, 2016

which is independent of the front office, utilizes available market information includingexecuted trades, market prices and market observable valuation model inputs so that fairvalues are reasonably estimated. The Company executes due diligence procedures overthird party pricing service providers in order to support their use in the valuationprocess. Where market information is not available to support internal valuations,independent reviews of the valuations are performed and any material exposures areescalated through a management review process.

While the Company believes its valuation methods are appropriate and consistent withother market participants, the use of different methodologies or assumptions todetermine the fair value of certain financial instruments could result in a differentestimate of fair value at the reporting date.

i

During the period ended December 31, 2016, there were no changes to the Company'svaluation approaches or techniques that had, or are expected to have, a material impacton its Balance Sheet.

The following outlines the valuation methodologies for the Company's assets andliabilities measured at fair value:

f Margin LoansFor certain long-term fixed-rate margin loans within customer receivables that areeconomically hedged with interest rate swaps, the Company has elected fair valueoption. These loans are collateralized by a portfolio of convertible and corporate bonds.For the purpose of fair value hierarchy classification, these loans are classified as Level2. Fair value is estimated based on market comparables.

OTC Derivative ContractsOTC derivative contracts consist of interest rate swaps with MLPF&S recorded inDerivative Assets on the Company's Balance Sheet.

` The fair values of derivative assets and liabilities traded in the OTC market aredetermined using quantitative models that utilize multiple market inputs includinginterest rates, prices and indices to generate continuous yield or pricing curves andvolatility factors to value the position. The majority of market inputs are actively quoted

F and can be validated through external sources. The OTC derivative contracts areclassified as Level 2 in the fair value hierarchy.

Fair Value Option ElectionThe fair value option election allows companies to irrevocably elect fair value as theinitial and subsequent measurement attribute for certain financial assets and liabilities.The fair value option election is permitted on an instrument by instrument basis at initialrecognition of an asset or liability or upon an event that gives rise to a new basis ofaccounting for that instrument.

r ,

L_

15F7

L-i

r-

j Merrill Lynch Professional Clearing Corp.Notes to Balance SheetDecember 31, 2016

The Company elected the fair value option for certain long-term fixed rate margin loans

r-

that are economically hedged with interest rate swaps.

r--

The contractual principal amounts outstanding of the margin loans approximate fairvalue at December 31, 2016.

5. Securities Financing Transactions

F The Company primarily enters into resale agreements, securities borrowed and securitiesL loaned transactions, which are all transacted with affiliates, to meet the financing needs

of its clients, satisfy margin requirements of clearing corporations, meet its regulatoryr- reserve requirements under client protection rules, and for liquidity requirements.

Collateral Received and PledgedThe Company receives securities, including U.S. Treasury and agency securities,corporate debt, and equity securities as collateral in connection with resale agreementsand securities borrowed transactions transacted with affiliates, as well as client margin

r loans. Under most agreements, the Company is permitted to sell or repledge thesecurities received (e.g., use these securities to secure repurchase agreements, enter into

`

securities lending transactions or to deliver these securities to counterparties to coverclient short positions).

At December 31, 2016, the fair value of securities received as collateral where ther Company is permitted to sell or repledge the securities was $105.8 billion, of which

$36.9 billion was received from affiliated companies. The fair value of these securitiesthat had been sold or repledged was $98.6 billion, of which $70.0 billion have been soldor repledged to affiliated companies.

Offsetting of Securities Financing Agreements_ All resale activities are transacted under legally enforceable master repurchase

Ir, agreements that give the Company, in the event of default by the counterparty, the rightto liquidate securities held.

All securities borrowing and lending activities are transacted under legally enforceablemaster securities lending agreements that give the Company, in the event of default by thecounterparty, the right to liquidate securities held and to offset receivables and payableswith the same counterparty. In certain instances, the Company offsets securities borrowingand lending transactions with the same counterparty on the Company's Balance Sheetwhere it has such legally enforceable master netting agreement and the transactions havethe same maturity date.

The table below presents the securities financing agreements included on the Company'sBalance Sheet at December 31, 2016. Balances are presented on a gross basis, prior tothe application of counterparty netting. Gross assets and liabilities are adjusted on an

F-1

L

16n

IL

Merrill Lynch Professional Clearing Corp.- Notes to Balance Sheet

r—December 31, 2016

aggregate basis to take into consideration the effects of legally enforceable masternetting agreements.

The column entitled "Financial Instruments" in the tables below includes securitiescollateral received or pledged under repurchase or securities lending agreements wherethere is a legally enforceable master netting agreement. These amounts are not offset onthe Balance Sheet but are shown as a reduction to the net balance sheet amount in thetable to derive a net asset or liability. Securities collateral received or pledged where thelegal enforceability of the master netting agreements is not certain is not included.


n Asset

Gross Netting Net Balance Financial Net

Assets Adjustment Sheet Amount Instruments o' AssetsReceivables under resale agreements $ 5,658,769 $ $ 5,658,769 $ (5,658,769) $

Receivables under securities borrowed

transactions 31,475,597 (17,429,987) 14,045,610 (13,866,003) 179,607Total

$ 37,134,366 $ (17,429,987) $ 19,704,379 $ (19,524,772) $ 179,607

I

Liabilities

Gross Netting Net Balance Financial Net

Liabilities Adjustment Sheet Amount Instrumentso) Liabilities

Payables under securities loaned

transactions $ 41,161,915 $ (17,429,987) $ 23,731,928 $ (23,543,263) $ 188,665

t

Total$ 41,161,915 $ (17,429,987) $ 23,731,928 $ (23,543,263) $ 188,665

(1) These amounts are limited to the securities financing asset/ iability balance and, accordingly, do not include excess collateral received/pledged.

F7

Securities Loaned Transactions Accounted for as Secured BorrowingsAll of the Company's securities loaned transactions are contractually overnight or

n continuous (i.e., no stated term) and transacted with affiliates. Certain agreements containa right to substitute collateral and/or terminate the agreement prior to maturity at the optionof the Company or the counterparty. The table below presents securities loanedtransactions by class of collateral pledged.


Class of Collateral PledgedDecember 31, 2016

U.S. government and agencies $ 4,628

- "

Corporate securities and other 761,889

Equities 40,395,398

Total $ 41,161,915

lJ

For securities loaned transactions, the Company receives collateral in the form of cash.Collateral is generally valued daily and the Company may receive or return collateralpledged, when appropriate.

At December 31, 2016, the Company had no outstanding repurchase-to-maturitytransactions.

17r—

Merrill Lynch Professional Clearing Corp.u Notes to Balance Sheet

December 31, 2016

`-- 6. Subordinated Borrowings

At December 31, 2016, the Company had a revolving subordinated line of credit withBank of America of $3.0 billion with a maturity date of April 29, 2018, of which $1.4

billion was outstanding. This borrowing, which has been approved for regulatory capitalF' purposes, bears interest at variable rates based on one month LIBOR plus a spread of

100 basis points.

7. Stockholders' Equity

The Company is authorized to issue 10,000 shares of $1 par value preferred stock, with aliquidation preference of $1,000, and 50,000 shares of $1 par value common stock. The

common stock of the Company is entirely held by MLPF&S. The preferred shareholdersare certain clients of the Company. During the period ended December 31, 2016, theCompany issued 50 shares of preferred stock and had no redemptions. At December 31,

2016, there were 1,385 preferred and 2,000 common shares issued and outstanding.

8. Commitments, Contingencies and Guarantees

r LitigationIn the ordinary course of business, the Company is routinely a defendant in or party tomany pending and threatened legal, regulatory and governmental actions and proceedings.

In view of the inherent difficulty of predicting the outcome of such matters, particularly

where the claimants seek very large or indeterminate damages or where the matters

' ' present novel legal theories or involve a large number of parties, the Company generally

cannot predict what the eventual outcome of the pending matters will be, what the timing

of the ultimate resolution of these matters will be, or what the eventual loss, fines or

penalties related to each pending matter may be.

In accordance with applicable accounting guidance, the Company establishes an accrued

liability when those matters present loss contingencies that are both probable and

estimable. In such cases, there may be an exposure to loss in excess of any amounts

accrued. As a matter develops, the Company, in conjunction with any outside counsel

handling the matter, evaluates on an ongoing basis whether such matter presents a loss

contingency that is probable and estimable. Once the loss contingency related to a matter

is deemed to be both probable and estimable, the Company will establish an accrued

liability and record a corresponding amount of litigation-related expense. The Company

continues to monitor matters for further developments that could affect the amount of

the accrued liability that has been previously established.

Commitments--- The Company has entered into various non-cancelable, long-term lease agreements for

premises and equipment that expire through the year 2018. Future minimum rental

LJ

18~I

t .

F--]


commitments with initial or remaining terms expiring after December 31, 2016, are

F7presented below:

L - (Dollars in thousands)

Year Ending TotalF-- 2017 $ 277

2018 70

$ 347r1

The amounts in the table do not include amounts related to lease renewal or purchaseoptions or escalation clauses providing for increased rental payments based upon

r

maintenance, utility and tax increases.

The Company obtains letters of credit from issuing banks to satisfy various counterpartycollateral requirements in lieu of depositing cash or securities collateral. Letters of creditaggregated $265.0 million at December 31, 2016.

As of December 31, 2016, the Company had unfunded loan commitments of $498.1million. These commitments expire within the next twelve months.

GuaranteesThe Company issues various guarantees to counterparties and is required to discloseinformation for guarantee arrangements such as the maximum potential amount of futurepayments under the guarantee, the term and carrying value of the guarantee, the natureof any collateral or recourse provisions and the current payment status of the guarantee.

F--1 The Company has a guarantee on behalf of a client with a foreign stock exchange forapproximately $5.3 million. The guarantee is secured by the assets in the client'saccounts and has no expiration. No contingent liability is recorded on the Balance Sheetsince this transaction is fully collateralized. The Company believes the potential for it tobe required to make a payment under this arrangement is remote.

The Company is a member of various securities and derivative exchanges and

t:clearinghouses. As a member, the Company may be required to pay a pro-rata share of

the losses incurred by some of these organizations as a result of another member'sdefault and under other loss scenarios. The Company's potential obligations may be

limited to its membership interests in such exchanges and clearinghouses, to the amount

(or multiple) of the Company's contribution to the guarantee fund or, in limited

instances, to the full pro-rata share of the residual losses after applying the guarantee

fund. The Company's maximum potential exposure under these membership agreements

` - is difficult to estimate; however, the potential for the Company to be required to make

these payments is remote.

In connection with its prime brokerage and clearing businesses, the Company performs

securities clearance and settlement services with other brokerage firms and

19


clearinghouses on behalf of its clients. Under these arrangements, the Company standsg g p Y

'

ready to meet the obligations of its clients with respect to securities transactions. TheCompany's obligations in this respect are secured by the assets in the clients' accountsand the accounts of their customers as well as by any proceeds received from thetransactions cleared and settled by the Company on behalf of clients or their customers.

' The Company's maximum potential exposure under these arrangements is difficult toestimate; however, the potential for the Company to incur material losses pursuant tothese arrangements is remote.

' 9. Employee Benefit Plans

' Bank of America provides pension and other postretirement benefits to its employeesworldwide through sponsorship of defined contribution pension, defined benefit pension andother postretirement plans. The Bank of America Corporation Corporate Benefits

' Committee has overall responsibility for the administration of these benefit plans.

Bank of America maintains certain qualified retirement and defined contribution planscovering the Company's full-time, salaried employees and certain part-time employees.'The defined benefit pension plans and postretirement benefit plans are accounted for inaccordance with ASC 715-20-50, Compensation — Retirement Benefits, Defined BenefitPlans-General ("Defined Benefit Plan Accounting"). Postemployment benefits areaccounted for in accordance with ASC 712, Compensation-Nonretirement PostemploymentBenefits. Required disclosures are included in the December 31, 2016 Form 10-K of Bank of

'

America.

Defined Contribution Pension PlansThe U.S. defined contribution plans sponsored by Bank of America include the Merrill

'

Lynch 401(k) Savings & Investment Plan ("SIP") and the Bank of America 401(k) Plan.The SIP is closed to new participants with certain exceptions. .

Defined Benefit Pension PlansCertain of the Company's employees are covered by Bank of America's qualified pension

' plan.

Bank of America has an annuity contract that guarantees the payment of benefits vestedunder a terminated U.S. pension plan. Bank of America, under a supplemental agreement,

' may be responsible for, or benefit from, actual experience and investment performance ofthe annuity assets. Bank of America made no contribution under this agreement for theperiod ended December 31, 2016. Contributions may be required in the future under this

' agreement.

Bank of America also maintains non-contributory, nonqualified pension plans which are'

unfunded and provide supplemental defined pension benefits (i.e., plans not subject to TitleIV of ERISA) for certain eligible U.S. employees.

20

!~ Merrill Lynch Professional Clearing Corp.Notes to Balance SheetDecember 31, 2016

Postretirement Benefits Other Than PensionsHealth insurance benefits are provided to eligible retired employees and dependents throughBank of America sponsored plans. The health care coverage is contributory, with certainretiree contributions adjusted periodically. The accounting for costs of health care benefitsfor most eligible employees anticipates future changes in cost-sharing provisions. As ofDecember 31, 2016, none of these plans had been funded.

Postemployment BenefitsBank of America provides certain postemployment benefits for employees on extendedleave due to injury, illness, or death and for terminated employees. Eligible employees whoare disabled due to non-work related illness or injury are entitled to disability income,medical coverage and life insurance. Severance benefits may be provided to eligibleterminated employees under the terms of a severance pay plan. All full-time employees areeligible for severance benefits subject to the terms of the severance pay plan.

10. Employee Incentive PlansIncentive plans are sponsored by Bank of America. Disclosures required by ASC 718,Compensation- Stock Compensation, ("Stock Compensation Accounting") are included

in the December 31, 2016 Form 10-K of Bank of America.

The Company participates in the Bank of America Corporation Key Employee Equity

I Plan ("KEEP"). Under the KEEP, Bank of America grants stock-based awards,

including restricted stock and restricted stock units ("RSUs") to eligible employees. The

RSUs are authorized to settle predominantly in shares of common stock of Bank ofr America. Awards granted in prior years were predominantly cash settled. The Company

also participates in other deferred compensation plans and awards programs.

i11. Income Taxes

The reconciliation of the beginning UTBs balance to the ending balance is presented in

the table below.

(Dollars in thousands)2016

Beginning Balance $ -

Increases related to positions taken during prior years 9,737

Balance at December 31, 2016 $ 9,737

As of December 31, 2016, the balance of the Company's UTBs which would, if

recognized, affect the Company's effective tax rate was $7 million. Included in the UTB

balance are some items, the recognition of which would not affect the effective tax rate,

7L

21r

L._,

F—

L _I


F' such as theortion of gross state UTBs that would be offset b the tax benefit of thep g YF7 associated federal deduction.

The Company does not anticipate a material change in the UTB balance during the next12 months.

The Company files income tax returns in numerous state and local jurisdictions eachn year. The Internal Revenue Service ("IRS") and other tax authorities in states and cities

in which the Company has significant business operations examine tax returnsperiodically (continuously in some jurisdictions). The table below summarizes the statusof significant tax examinations, by jurisdiction, for the Company as of December 31,2016. During 2016, the Corporation settled federal examinations for the 2010 and 2011tax years and settled various state and local examinations for multiple years includingNew York through 2014. Field work for the federal 2012 through 2013 examinationswere substantially completed during 2016.

Years Subject to Status at

Jurisdiction Examination(1) December 31, 2016

U.S. federal 2012-2013 Field examination

New York 2015 To begin in 2017

(1) All tax years subsequent to the above years remain open to examination.

At December 31, 2016, the Company's accrual for interest and penalties that related toincome taxes, net of taxes and remittances, was $0.5 million.

j Significant components of the Company's net deferred tax assets and liabilities atDecember 31, 2016 are presented below.

F— (Dollars in thousands)

Deferred tax assetsL— ~

Accrued Expenses $ 4,272

r~ State taxdeduction 3,181

Other 1,906

Gross deferred taxassets 9,359

Valuation allowance -

~' Total deferred taxassets, net of valuation allowance 9,359

Net deferred tax asset $ 9,359

The Company is included in the consolidated U.S. federal income tax return and certaincombined and unitary state income tax returns of Bank of America. At December 31,2016, the Company had a current income tax payable due to its affiliates ofapproximately $83.0 million as a result of its inclusion in consolidated, combined, and

r, 22

L


unitary tax return flings with Bank of America. During the year ended December 31,2016, the Company made approximately $82.4 million of income tax payments.

12. Subsequent Events

ASC 855, Subsequent Events, requires the Company to evaluate whether events,occurring after the Balance Sheet date but before the date the Balance Sheet is availableto be issued, require accounting as of the Balance Sheet date, or disclosure in theBalance Sheet. The Company has evaluated subsequent events through the date ofissuance.

There were no material subsequent events which affected the amounts or disclosures inthe Balance Sheet.

F__ 13. Regulatory Requirements

L As a registered broker-dealer and futures commission merchant, the Company is subjectto the net capital requirements of SEC Rule 15c3-1 and CFTC Regulation 1.17. TheCompany has elected to compute the minimum capital requirement in accordance withthe "Alternative Net Capital Requirement" as permitted by SEC Rule 150-1. AtDecember 31, 2016, the Company's regulatory net capital as defined by Rule 15c3-1was $2.8 billion and exceeded the minimum requirement of $480.9 million by $2.3billion.

IrI The Company is subject to the customer protection requirements of SEC Rule 150-3.For the December 31, 2016 customer reserve computation, the Company segregated in aspecial reserve account, for the exclusive benefit of customers, cash and qualifiedsecurities valued at $1.8 billion.

The Company also is required to perform a computation of reserve requirements forPAB pursuant to SEC Rule 156-3. For the December 31, 2016 PAB reservecomputation, the Company was not required to segregate funds in a special account forthe exclusive benefit of PAB as the Company's customer reserve computation excessdebits covered the PAB requirement, however the Company did deposit $80.0 million ina special reserve account for the exclusive benefit of PAB.

F As a futures commission merchant, the Company is required to perform computations ofthe requirements of Section 4d(2), Regulation 30.7 under the Commodity Exchange Act.At December 31, 2016, assets segregated and secured totaled $2.2 billion and exceededrequirements by $782.3 million.

F-~

23

Documents

17017646 balance sheet is the responsibility of the Company's management. Our L responsibility is to express an opinion on the balance sheet based on our audit. We conducted our audit